Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Financial Statement Effects of Inventory Costing Methods

Financial Accounting

5. Inventory

Financial Statement Effects of Inventory Costing Methods

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Multiple Choice

Companies using which of the following inventory costing methods should apply the lower of cost or market (LCM) rule to their inventory?

Retail inventory method only

FIFO and weighted-average cost

Specific identification only

LIFO only

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Verified step by step guidance

Understand the concept of the lower of cost or market (LCM) rule: This accounting principle requires companies to report inventory at the lower value between its historical cost and current market value. It ensures that inventory is not overstated on the financial statements.

Identify the inventory costing methods mentioned in the problem: FIFO (First-In, First-Out), weighted-average cost, specific identification, LIFO (Last-In, First-Out), and retail inventory method.

Recognize which inventory costing methods typically apply the LCM rule: The LCM rule is commonly applied to inventory methods like FIFO, weighted-average cost, and LIFO because these methods involve valuing inventory based on cost flows and market conditions. Specific identification and retail inventory methods may not always require LCM application due to their unique valuation approaches.

Analyze why FIFO and weighted-average cost are correct answers: FIFO assumes the oldest inventory is sold first, while weighted-average cost calculates an average cost for all inventory. Both methods can result in inventory values that need adjustment under the LCM rule if market conditions cause a decline in value.

Conclude that companies using FIFO and weighted-average cost should apply the LCM rule to their inventory, as these methods are sensitive to changes in market value and historical cost.